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The Money You and Loved Ones May Be Leaving on the Table

02/18/2015 09:50 am ET | Updated Apr 20, 2015

Do you take Social Security spousal benefits on your ex's work record? Are you taking spousal benefits while waiting until 70 to collect your own? Are you a widowed spouse, a disabled one, a gay one? Do you support elderly parents? Young children?

A new book I've helped shepherd (or doula) into print, Get What's Yours: The Secrets to Maxing Out Your Social Security, was conceived after an approximation of tennis four years ago, when the guy across the court, Boston University economist and friend Larry Kotlikoff asked my own Social Security plans.

We were taking a break from running after errant shots. Larry launched into a harangue, as he often does; this one, about Social Security's impossible complexity. I was listening, as usual, with a skeptical journalist's ear. Or, maybe, since it was Larry, just half-listening.

Then Larry asked how old I and my wife were, and when we were planning to take our Social Security benefits

Dismissively, I told Larry not to worry: we had it all figured out. We would both wait until 70, when I would get something like $40,000 a year instead of the $30,000 or so if I took my benefits at 66, my "full" -- but not maximum -- retirement age, coming right up. I had been reading and saving those annual green statements from the Social Security Administration for years reporting my "Estimated Benefits." I'd been reading his wife's too. The difference between her taking at the "full" age of 66 and waiting till the maximum benefit at 70 was lower, because she had earned less over the highest 35 years of her working life, but it too was about a third greater. As the family's financial planner, I knew just how much we were entitled to.

But how old are you guys? Larry asked.

What difference does it make? I asked. We were both waiting until 70.

It makes a big difference, said Larry.

Okay, my wife would soon turn 67; me, 66.

Here's what you do, said Larry, never at a loss when it comes to speaking in the imperative. Your wife should apply for her Social Security retirement benefit but then "suspend" it. That is, she makes herself eligible for the benefit by putting herself into the system, but doesn't take any benefit at all-- yet.

Then, said Larry, when you (Paul) turn 66, you apply just for a spousal benefit. When you each hit 70, you do as originally planned: each takes your own retirement benefits, at which point they will start at their highest possible values, 32 percent higher than at "full" retirement age. And the benefit will have been adjusted upward for inflation over the four years you waited.

Or, Larry continued, clearly thinking aloud, you apply and suspend at 66 and your wife begins taking the spousal benefit, since you earned more than she did, didn't you?

I can be quite cavalier of what I consider Larry's occasional flights of fantasy, Larry being the epitome of "often overstated, but never in doubt." His well-known work on "the coming generational storm" would be a case in point. Yet I had begun to pay close attention. Having reported on business and economics on public television for 38 years, I understood the intricacies of business, finance, and economics better than most Americans (though admittedly, that may not be saying much). The exceptions, however, were the professional economists I'd befriended. Larry was one of them, and among the most well-versed in financial planning.

Spousal benefits? I'd vaguely heard of them but never imagined my wife or I were eligible for any, though, had you asked me why not, I couldn't have told you, except maybe that, as relatively high earners, compared to the U.S. median, we wouldn't deserve to.

Spousal benefits for four years. That should be almost $50,000, Larry quickly estimated.

An aside is in order here. Larry is a world-famous scold or, he will tell you, dead-on Cassandra, with respect to Social Security's insolvency. Advising people like me to take extra benefits from the system while himself decrying the system's funding shortfall was not what I expected to hear. But Larry believes it's not fair that some beneficiaries get more than others simply because they happen to know the system's rules -- or know Larry. Who could disagree with him?

$50,000?

Explain, I said.

Well, if your wife's Social Security full retirement benefit were, say, $24,000, you'd be eligible to get half that as a spousal benefit: $12,000 a year. And if you get $12,000 a year from age 66 to age 70, that's $48,000. If, on the other hand, your wife takes the spousal benefit on your Social Security earnings record, she'll get more per year but for only three years instead of four, because she'll be 67 by the time you become eligible, only three years from 70.

However number-laden the trees, the forest was plain to see: there seemed to be an unambiguous strategy for maximizing benefits that we were eligible to collect, having contributed 6.2 of our salaries for decades, up to the taxable Social Security ceiling, as had our employers. But it was a strategy we were entirely unaware of.

At least I was aware of the benefits of waiting until 70, though, and the fact that every year of waiting past the initial eligibility age of 62 confers a substantial, inflation-protected premium. If you wait until age 70 instead of 62, your lifetime benefits will be 72 percent higher than if you take early. And yet -- fully 41 percent of American men and 46 percent of women apply for Social Security at 62. For many of them, that's almost surely nuts, though of course there are plenty of Americans who can't afford to wait and some who are sure to die sooner rather than later. Even in their situation, however, their dependents will benefit to the extent that they wait.

In fact, one of the key reasons people don't wait is a fear that Social Security is so broke they won't get their benefits. All three co-authors think that's crazy, even though Larry calls the system "bankrupt." (Larry is a noted critic -- some would say crank -- on the subject of Social Security's solvency. Accordingly, the last chapter of the book is a spirited disagreement among the three authors on the system's financial future.)

There are nearly as many "secrets" and "gotchas" in the labyrinth that is Social Security as there are official rules, of which there are more than 2000.

But let's finish this with our three main ones: Be patient in taking benefits; take all the benefits to which you're entitled, such as spousal benefits; since you can't take more than one benefit at a time, get the timing right.

I began with spousal benefits. They were not intended, as best one can tell, to benefit two-earner families with above-average incomes. That has led at least two double-earner couples I know to reject spousal benefits as "gaming" the system and to decline them, even though they're fully entitled to take them. An alternative approach would be to raise taxes on such couples by, for example, hiking the ceiling on taxable Social Security income, a ceiling which seems similarly hard to justify, especially in an era of greater and greater incomes at the top, relative to the rest of us.

Personally, I wouldn't be sorry to see an income test for getting spousal benefits, wouldn't have been sorry had it preceded my turning 66. And perhaps Congress and the President will be able to agree on this. It would seem to have bi-partisan appeal. For that matter, I would be happy to see the income tax mortgage interest deduction done away with, though I take it, and don't know anyone who doesn't.

But for the present, the Social Security system is what it is: a maddeningly complex legal puzzle that's impossible to solve without help. The choices you choose to make about benefits are up to you. But I figure at least we all ought to know them.

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